A Brief Update on Positioning and Sentiment in Gold

Even while gold’s fundamental price according to Keith Weiner’s calculations (in which he compares spot to futures prices) stands some $140 above the current market price (as of the end of last week), futures market speculators have turned more bearish on gold than at any time in the past 13 years.

Photo credit: Lisi Niesner / Bloomberg News

When there is great unanimity among traders about a market’s direction, they are very often going to be proved wrong – at least in the short to medium term (i.e., over time periods lasting from weeks to months). The caveat is that even more pronounced positioning extremes have occurred in a few short time periods during the 1980s and the 1990s, and there is obviously no law that says this cannot happen again.

Last week, the smallest net speculative long position since January of 2002 was reported (this chart shows the net hedger position, which is the inverse of the net speculative position) – click to enlarge.

However, it is still quite noteworthy that speculators as a group are more bearish on gold today than they were at the lows of its 20 year long secular bear market in 1999-2000. This definitely means one thing: once a rally does get underway, there is going to be a lot of fuel to support it as this extreme in pessimism unwinds. Gold stocks meanwhile continue to diverge positively from gold and silver, just as they have exhibited persistent negative divergences near the 2011 – 2012 highs.

Here are a few more charts illustrating the current situation; first different ways of charting the net positions of speculators and hedgers:

Net speculator and hedger positions, as well as open interest in bar chart form – click to enlarge.

The next chart shows the very same thing, but trader positions are further dehomogenized, with small and large speculators as well as hedgers shown separately in a line chart. Open interest is charted as a line as well. Open interest in COMEX gold futures is actually historically quite large at the moment.

The Bullish Consensus Compared to the 1999-2000 Lows

Sentimentrader has created the so-called Optimism Index, or Optix for short, which is an average of the most popular and well-known sentiment surveys and positioning data. From the web site’s description of the indicator:

“To calculate this gauge of public opinion, we have created an index based on many of the established surveys currently in existence, some of which are noted below, along with other measures of sentiment, such as from the options and futures markets. The combination of that data is the foundation of the Optimism Index, or Optix.

No matter what population the survey monitors, it tends to correlate very highly with all the other populations. People tend to think alike, and it’s rare to see any of the surveys diverge too far from all the others. The correlations among them are very high, and have been consistently so for many years.

Like most sentiment data, this one is a contrary indicator. When optimism becomes too high, we should look for prices to stall out or decline; when it is too low, we should look for rallies.

When the Optix moves above the red dotted line in the chart, it means that compared to other readings, we’re seeing a statistically extreme value. The bands are based on the past few years of trading, but you also want to look at the absolute level – if it’s at 90%, then there’s no question we’re seeing an historic level of bullish opinion. Watch for readings above 80% (or especially 90%) to spot those dangerous times when the public is overly enthusiastic about a commodity.

Conversely, when the Optix moves below the green dotted line, then the public is too pessimistic about the commodity’s prospects for further gains compared to their opinion over the past year. Looking for absolute readings under 20% (or especially 10%) can lead to good longer-term buying opportunities.”

The Gold Optix readings since mid 2013 are among the lowest in history. On average they are far more extreme than those recorded at the secular bear market lows in 1999-2000. The most recent reading showing bullish consensus of a mere 14% is only 6 points above the all time low recorded in late 1997 and lower than any of the readings of the 1999-2000 period (the absolute low in that time period was seen in late February 2001 and stood at 16%) – click to enlarge.

As you can see, the recent period has been one of quite persistent and extreme pessimism. Since sentiment is largely a function of price movements, one must of course not overestimate its meaningfulness. However, one thing is certain: rare and noteworthy extremes tend to at least have short to medium term significance. Once a long string of extreme readings has been recorded, the probability that they will prove to be of long term importance rises strongly.

This is especially so given the fact that gold is currently approaching an important technical support area in the $1,040 to $1,050 region (the March 2008 high). Moreover, there are actually many parallels to the 1999-2000 period, most notable among them a rising stock market combined with ever greater weakness in junk bonds, a tightening Fed and concomitant dollar strength, and a flattening yield curve.

The flattening yield curve, illustrated by the ratio between 10 and 2 year treasury note yields. In the short term, this flattening is actually quite bearish for gold, but at the same time it is actually long term bullish. This is so because it will ultimately trip up the echo boom and the economic recovery (such as it is), and bring about a reversal of the Fed’s current monetary policy stance – click to enlarge.

The next chart shows what has happened in terms of Fed policy and the dollar in 1999-2000 compared to 2014-2015. This may be helpful in terms of providing a potential road-map:

Conclusion

As we have pointed out on previous occasions, it is time for both traders and investors to pay very close attention to this market. What could turn out to be a major opportunity is slowly but surely taking shape.

It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

5 Responses to “Gold Positioning Update – New Extremes Are Recorded”

Gold has broken through the EUR 1,000 support though and is currently trading at around EUR 970 per ounce. Not exactly showing strength here. Let see if the EUR 866.73 2013 low – on a daily closing basis – holds or gets taken out.

michaelfmh …. I think rates on debt will be governed by the migration of the market toward debt-free currency.
The FED has little to no room for an increase in rates until such time that they feel some effect by way of the “supplementation” of debt-free liquidity in support of debt-free trades and economic stimulus. It’s the added liquidity that will not only allow rates to rise, safely, but also acts as the much needed catalyst for bullion prices to rise as price manipulation subsides. There are several notes in the chord.

As I already stated above , banks are “pro liquidity”, not “anti-gold” but a polarized paradigm may not create the distinction.

It’s the application of gold based currency and its stimulating movement that will free bullion from price suppression, imo. If you’re sitting on it for higher prices, you may wait a long time.

Contrary to what some believe, banking interests are not “anti-gold” in letting the price go. They are “anti-hoarding of gold” in terms of its liquidity. Bankers are likely afraid of rising gold prices without having a modern “kick-point” where gold moves toward direct stimulation of the economy. People are creatures of habit and hoarding gold is part of that old tired habit. The last thing we all want to see is $2500 gold and a completely depressed economy because gold isn’t helping by greasing the wheels.

Have bankers not put liquidity as a top priority in the past ? This should not be something that is seen as new.

Most read in the last 20 days:

When Money Dies
In part-I of the dispatch we talked about what happened during the first two days after Indian Prime Minister, Narendra Modi banned Rs 500 and Rs 1000 banknotes, comprising of 88% of the monetary value of cash in circulation. In part-II, we talked about the scenes, chaos, desperation, and massive loss of productive capacity that this ban had led to over the next few days.
Indian prime minister Narendra Modi – another finger-wagger, as can be seen in this...

A Market Gripped by Fear
The Indian Prime Minister announced on 8th November 2016 that Rs 500 and Rs 1,000 banknotes would no longer be legal tender. Linked are Part-I, Part-II and Part-III updates on the rapidly encroaching police state.
The economic and social mess that Modi has created is unprecedented. It will go down in history as an epitome of naivety and arrogance due to Modi’s self-centered desire to increase tax-collection at any cost.
Indian jewelry...

Hidden Motives
It is well-known that India's government wants to coerce its population into “modernizing” its financial behavior and abandoning its traditions. The recent ban on large-denomination banknotes was not only meant to fight corruption.
Obviously, this very bad Indian has way too much cash. Just look at him, he looks suspicious!
Photo via thenewsminute.com
In fact, as our friend Jayant Bhandari has pointed out, fresh avenues for corruption ...

A Brief Recap
India's Prime Minister announced on 8th November 2016 that Rs 500 and Rs 1,000 banknotes will no longer be legal tender. Linked are Part-I, Part-II, Part-III, and Part-IV, which provide updates on the rapidly encroaching police state
Expect a continuation of new social engineering notifications, each sabotaging wealth-creation, confiscating people’s wealth, and tyrannizing those who refuse to be a part of the herd, in the process destroying the very backbone of the...

Bad Monday
Some Monday mornings are better than others. Others are worse than some. For one Amazon employee, this past Monday morning was particularly bad.
No doubt, the poor fellow would have been better off he’d called in sick to work. Such a simple decision would have saved him from extreme agony. But, unfortunately, he showed up at Amazon’s Seattle headquarters and put on a public and painful display of madness.
Good-bye cruel world! On this our planet,...

Free Money!
BALTIMORE – Last week, the Dow punched up above 19,000 – a new all-time record. And on Monday, the Dow, the S&P 500, the Nasdaq, and the small-cap Russell 2000 each hit new all-time highs. The last time that happened was on the last day of December 1999.
Ironically, two events that were almost universally expected to trigger large stock market declines were followed by quite rapid and strong gains. Would the market have fallen if Hillary Clinton had won...

A Major Crisis
Last week Jayant Bhandari related the story of the overnight ban of certain banknotes in India under cover of “stamping out corruption” (see Gold Price Skyrockets In India after Currency Ban Part 1 and Part 2 for the details).
Banned 500 rupee banknotes
The problem is inter alia that the sudden ban of these banknotes has hit the Indian economy quite hard, given that 97% of all transactions in the country are cash-based. Not only that, it has...

Permanently Skewed
TRUMP HOTEL, New York – Trump’s rambling army – professionals, amateurs, camp followers, and profiteers – is marching south, down the I-95 corridor. There, on the banks of the Potomac, it will fight its next big battle.
Lieutenants in Trump's army: Bannon, Flynn & Sessions
Photo credit: Drew Angerer / AFP
Here at the Diary, we do not like to get involved in politics. But this is a special time in the history of our planet – a...

Stumped by the Bust
In the slump of a cycle, businesses that were thriving begin to experience difficulties or go under. They do so not because of firm-specific entrepreneurial errors but rather in tandem with whole sectors of the economy. People who were wealthy yesterday have become poor today. Factories that were busy yesterday are shut down today, and workers are out of jobs.
What has caused the bust? The modern-day economic orthodoxy continues to be unable to provide...

A Strong First Half of the Year, Followed by Another Retreat
In early 2016 gold had a big bull run. The precious metal rose close to 25% this year, pushed higher in a summer rally that peaked on July 10th. Gold experienced a bumpy ride over the remainder of the summer though, as investors became increasingly concerned about a potential rate hike by the Federal Reserve. Uncertainty returned to gold market and has intensified further since then.
Initially, gold rallied sharply...

The Trump Trade
After 35 years of waiting... so many false signals... so often deceived... so often disappointed... bond bears gathered on rooftops as though awaiting the Second Coming. Many times, investors have said to themselves, “This is it! This is the end of the Great Bull Market in Bonds!”
The long bond's long cycle – red rectangles indicate when the post 1980 bull market was held to be “over” or “over for sure” or “100% over”, etc. We have...

A Very Odd Growth Spurt in the True Money Supply
The growth rates of various “Austrian” measures of the US money supply (such as TMS-2 and money AMS) have accelerated significantly in recent months. That is quite surprising, as the Fed hasn't been engaged in QE for quite some time and year-on-year growth in commercial bank credit has actually slowed down rather than accelerating of late. The only exception to this is mortgage lending growth - at least until recently. Growth in...